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Hosts Catherine Yeung, Investment Director, and Marty Dropkin, Head of Asian Fixed Income & Hong Kong Investments, are joined by Equity Analyst & Portfolio Manager Yuanlin Lang and Senior Credit Analyst & Portfolio Manager Ming Gong to find out how the three key sectors of healthcare, education, and housing - commonly referred to in China as the 'three mountains' because they represent the rising burden of the cost of living for many households - are adjusting.
With additional contributions from David Hoidal, CEO of the Shanghai-based hospital operator DeltaHealth, and Tina Tian, Equity Portfolio Manager at Fidelity.
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Introduction to common prosperity
Marty Dropkin: “First, I think we could use a bit of background. So, “common prosperity”, or gongtong fuyu, aims to narrow the wealth gap after several decades of rapid economic growth in China that allowed many people to “get rich first”. The campaign seeks to rein in what the leadership describes as the “disorderly expansion of capital” by introducing regulatory “traffic lights” to stop things like monopolies, price gouging or unfair competition outright. The stated goals of common prosperity are focused on economic growth, but then dividing that growth more equitably. For example, by making sure small and medium-sized enterprises can stay competitive, and especially that they can continue to create new jobs.”
Catherine Yeung: “Marty, job creation is certainly very high up on the government's agenda at the moment. And in fact, this initiative that you've explained, we really saw it accelerate last year through waves of regulatory tightening. And a lot of this tightening has targeted three key areas, that being healthcare, education and housing, commonly referred to in China as the “three mountains”. Now, they're known as the three mountains because they represent big and rising burdens of the cost of living for many households. Over the past year or so, companies operating in these sectors have seen significant market volatility and, dare I say, quite negative sentiment when it comes to how investors have viewed them. So, how are they responding and adapting to the new operating environment? What's working and what isn’t? And what strategic or tactical adjustments are investors making in response?”
On running a hospital in Shanghai during lockdown
David Hoidal: "We're not a Covid hospital, but I would say the operative word has been ‘challenging’. Without a doubt, several things I would touch on certainly. First, when the outbreak and the lockdown started to go into place, the primary concern was around supply chain issues. But we've been very successful at being able to maintain medications, consumables, even food supply, which has been a challenge for a lot of people. Probably the most significant has been related to staffing, as you'd imagine, with a lot of communities, actually the entire city, in lockdown. We started to house a lot of our staff at the hospital, some of whom we've housed in the hospital for weeks. Some of them have been there for a couple of months. But all in all, we've done quite well.”
On group purchasing organisation within China’s healthcare industry
Yuanlin Lang: “So, GPO is basically on the generic drugs. So, if we look back in China, the market is very much generic drug-centric before. In China, around 60% of the pharmaceutical market is dominated by generic drugs. And then before GPO was introduced, the generic drugs even go off patent. They still can charge at a very high price, which means the insurance funds needs to pay a very pricey generic drugs but don't have room to compensate to reimburse for the innovative drugs. And then this is why if people get ill and then they want to get a better treatment, they still need to pay out of pocket. And all this has been changed from 2018 when China introduced the GPO.”
On whether China’s online gaming industry is still an attractive investment opportunity
Tina Tian: “I think so. So, I think, you know, the most important thing is what the game companies have done really effectively to address the concerns of regulators. So, you know, with a short period of time of new game approval suspension, we're seeing the approval process resume and come back. So, things are back to normal, right. And secondly, if you look at the actual impact on the business itself, it's actually pretty small. So, the fourth quarter of 2021 was actually the first full quarter that we are seeing impact from the minor protection measures. Obviously, you know, time spent by minors have been down by like 80%. The grossing, i.e. the game revenue, spent by minors are down as well because of, you know, naturally, it just come down together with the time spent like, you know, 70, 80%. But still that contribution is only low single digit for most game companies. So, the impact is manageable. And really, you know, the regulators are not trying to kill the industry for everybody, it’s really to avoid or reduce the distraction for kids and protect the kids. So, as far as that concern is taken care of, the industry can move on.”
On the challenges to engineering a complete turnaround for the property sector
Ming Gong: “Yes, I see three key challenges. Firstly, the housing demand had already plateaued before the pandemic, with national property sales hovering around 16 trillion RMB. And I think property sector back then was already going through structural changes with slowing urbanisation and declining birth rate. Secondly, the policy induced deleveraging that, you know, led to historically high default rate last year in the property sector has negatively impacted homebuyers’ confidence as there are concerns over developers’ project completion abilities. So, I think it's imperative for the regulators to execute a soft landing plan sooner rather than later. And lastly, you know, I think the traditional easing, traditional piecemeal easing measures are likely to be less effective now than before, considering the overall home purchasing power has reduced on the back of, you know, rising unemployment and the weaker economic growth. In addition to that, the mobility restrictions associated with, you know, virus control is likely to add another layer of uncertainty to the situation which could potentially prolong the sector recovery.”